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Costa Rica in the Panama Papers leak

Update, Wednesday, April 6:

Following is a right of response to this story from former President Miguel Ángel Rodríguez (1998-2002). 

My government stopped the abuse of CATs

Your publication “Costa Rica in the Panama Papers leak” has the facts upside down regarding the investigations on the fraudulent use of the Certificados de Abono Tributario (CATs) at the end of the nineties.

It was my government the one that launched the investigations on this issue, and furnished personnel of the Finance Ministry to the Prosecutors Office so that the criminal cases could be brought to trial – most of them successfully.

In addition to fighting fraudulent use of CATs, my Government also did propose and got Congressional approval for a tax on legally obtained CATs, and used the proceeds to kick start police professionalization for the first time in Costa Rican history – ever.

My government was never “under scrutiny for the CAT program.” This is a well-known fact.

Original story continues here:

Sunday’s release of the Panama Papers, the massive document leak revealing the offshore activities that some of the world’s elite carried out with Panamanian law firm Mossack Fonseca, has launched investigations into possible tax evasion across the globe, and likely in Costa Rica.

Dozens of Costa Rican businesses and individuals, including former government officials, media magnates and prominent businesspeople, are mentioned in the papers as doing business through Mossack Fonseca. Though most have not been directly accused of criminal activity, yet, media outlets and onlookers — including the administration of Luis Guillermo Solís — have been quick to suggest that some of the activities mentioned in the documents point towards attempts to avoid paying taxes in Costa Rica.

The Solís administration said Sunday that the Finance Ministry will investigate all persons, corporations and law firms mentioned in the Panama Papers, “in which possible acts of tax evasion and fraud are denounced.” It said, if necessary, the government would also audit tax records. 

The Solís administration has been pushing for laws and policy changes designed to increase taxes and crack down on tax evasion and money laundering. Its efforts have met with strong resistance from business leaders and opposition lawmakers.

The administration released a statement Sunday in response to news reports about the Panama Papers, saying the reports “confirm the urgency of having modern legislation in terms of value-added and income taxes … through a complete fiscal reform which closes the majority of loopholes for tax avoidance.”

The Panama Papers investigation resulted from a trove of files leaked to the German newspaper Suddeutsche Zeitung, which shared the information with more than 100 media outlets that are part of the International Consortium of Investigative Journalists. In Costa Rica, DataBaseAR, Amelia Rueda’s investigative wing, and the University of Costa Rica’s Semanario Universidad participated in the project.

Reporters spent up to a year sifting through millions of emails, financial spreadsheets and corporate records “to expose the offshore holdings of world political leaders, links to global scandals, and details of the hidden financial dealings of fraudsters, drug traffickers, billionaires, celebrities, sports stars and more,” according to the ICIJ.

Here’s some of what the data revealed about Costa Rican firms and individuals, according to Semanario Universidad and DataBaseAR:

Intermediaries. More than 30 Costa Rican law firms have served as intermediaries between Mossack Fonseca and firms and individuals based in Costa Rica to set up offshore corporations. Nearly half of those offshore entities — more than 360 — were set up in Panama and other jurisdictions with generous corporate tax policies and minimal oversight, DataBaseAR reported.

The purpose for setting up the firms, 800 in total, ranged from doing business and acquiring property in Panama, which is perfectly legal, to “intricate structures with signs of possibly hiding assets” from Costa Rica’s tax authorities, according to the investigation.

The law office that helped set up the largest number of offshore companies for Costa Rica-based firms was Gonzalo Fajardo & Asociados, which was founded by former Finance Ministry official and later Economy Minister Gonzalo Fajardo Salas. For nearly two decades Fajardo’s firm helped companies here set up 82 offshore corporations in tax havens, according to DataBaseAR.

Family members of Fajardo told DataBaseAR that he couldn’t comment on the report because of lingering effects from an injury suffered last year.

Borda Azul. Documents scrutinized by Semanario Universidad and DataBaseAR suggest that Mossack Fonseca helped the now-defunct tuna export company Borda Azul S.A. set up a shell company in the British Virgin Islands as a way to dupe Costa Rican tax officials. The company was owned by former president of the Costa Rican Football Federation (1999-2006) Hermes Navarro; the company’s vice president was Cuba-born, U.S.-educated Jerry ten Brink.

In the late 1990s, the Costa Rican Finance Ministry, the Prosecutor’s Office and other agencies opened investigations into some export companies, including Borda Azul, for alleged fraudulent use of tax credit certificates (CATs), an incentive program created in the early 1970s and applied in the ’80s and ’90s for non-traditional exports.

At the time, the administration of then-president Miguel Ángel Rodríguez (1998-2002) was under scrutiny for the CAT program, according to Semanario Universidad. Legislators, the newspaper noted, were angered that the government’s budget proposal allotted huge sums under the CAT program to a handful of export companies, some of which were owned by government officials. In a right of reply (see above), Rodríguez disputed that his administration was ever criticized over abuses of the CAT program, saying that, “It was my government … that launched the investigations on this issue, and furnished personnel of the Finance Ministry to the Prosecutors Office so that the criminal cases could be brought to trial.”

According to the daily La Nación, authorities by 1997 already had accused dozens of export companies of using the CAT program to launder millions of dollars in drug trafficking profits and other acts of fraud.

According to the investigations by Semanario Universidad and DataBaseAR, Mossack Fonseca helped Borda Azul fabricate invoices from the latter’s British Virgin Islands-based shell company, in order to inflate its costs and its export figures. The former was key to keeping Borda Azul’s taxes low; the latter allowed it to continue participating in the CAT program.

In a letter published by Seminario Universidad, dated Oct. 19, 1998, from lawyer Ramsés Owens to his bosses at Mossack Fonseca, Owens explains the investigation into CATs and the situation of his client Borda Azul. “Doing an analysis, it’s clear that our client avoided paying taxes. … In the worst of circumstances, being very fatalistic, the Costa Rican government could, after years of investigation, suspend the transfer of CATs to Borda Azul for irregularities but never send anyone to jail.”

In the letter Owens urges his bosses to continue offering its invoicing services to Borda Azul, “because that’s what we do, because 95 percent of our work consists, coincidentally, of selling vehicles for avoiding taxes. …”

In a written response to the International Consortium of Investigative Journalists, published in DataBaseAR, Mossack Fonseca said the firm “completely disagrees with any assertion that the principal function of the services we provide is to facilitation the avoidance and/or evasion of taxes.”

Another interesting angle to the story, according to DataBaseAR, is that Juan Diego Castro worked as a defense attorney for Navarro and Ten Brink, securing an exoneration from criminal fraud charges in the case in 1999. Before that, Castro had served as Costa Rica’s justice minister under former President José María Figueres Olsen (1994-1998), resigning from the post in 1997. At that same time, he had presided over the Caribbean Financial Action Group against money laundering and drug trafficking, calling the problem of money laundering a “cancer,” according to the daily La Nación.

In response to the Panama Papers reports, a spokesman for Castro told DataBaseAR that attorney-client confidentiality prevented him from commenting on the fraud exoneration, and that Castro had no relation to Mossack Fonseca.

Orlando Guerrero Vargas. The Panama Papers revealed several companies in Panama and the British Virgin Islands registered to Orlando Guerrero Vargas, campaign treasurer for San José Mayor Johnny Araya during the latter’s failed presidential election bid. Guerrero is mentioned in the U.S. indictment of former Costa Rica soccer official Eduardo Li. Prosecutors said Li received a $300,000 bribe through bank accounts located in Miami, Florida, and Panama, registered to the Costa Rican company Warrior Holdings S.A., whose treasurer is Li’s friend Guerrero.

Correction: A previous version of this story incorrectly stated that a Finance Ministry investigation into the CAT program was begun in the late 1980s. Those investigations started in 1998, the same year of the leaked Panama Papers correspondence regarding Borda Azul’s potential legal troubles. The CAT program was created by law in 1972 and later gained momentum in the 1980s. We regret the error. 

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